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Your Financial Future

Are Annuities Right for You?

  • Payouts may fluctuate with interest rates
  • "Laddering" helps spread the risk
  • Values can adjust due to inflation

In 2006 I took a buyout from the Washington Post. In addition to getting my full pension five years early, I got a lump sum equal to two years’ pay.

The question confronting me back then was whether to invest that money in the markets or to buy an annuity, which would provide monthly payments to the end of my life, augmenting my pension.

I took the annuity, and then asked a financial expert whether I had made the right choice. The answer was that it might have been too conservative, given the fact that I already had a future stream of predictable payments from my pension and eventually from Social Security. A better option for the money may have been the market, where I was likely to get a higher return.

But now—when we look at the markets and see more risk than reward—I’m feeling pretty happy with the choice I made.

And, based on a new Fidelity Investments survey of fee-for-services financial advisers, other investors also are starting to value predictable returns. According to the advisers surveyed, 83 percent of their investor clients ages 55 through 70 think guaranteed income is more important than above-average gains. After years when everyone was going for the smart money, we’re taking a shine to the safe money.

The annuity I bought with my lump sum was a single-premium, fixed-payment annuity, a product designed to make sure I don’t outlive my savings. Basically, it’s similar to a traditional pension, except it’s the individual, not the employer, whose contribution buys a lifetime stream of monthly payments. However, there are some important distinctions.

Employer-funded pensions cover a pool of people, including some who will die young, leaving more money for those who survive. On the other hand, the market for commercial annuities for individuals, which typically are sold by insurance companies, tends to attract people who expect to live longer than average. As a result, commercial annuities tend to have lower payouts. And, while employer-provided annuities—in some cases, as at the Post, offered in addition to the traditional pension (itself an annuity) as an option for investing a lump sum—are required to be gender-neutral, commercial annuities pay women less because of their anticipated greater longevity. So if you’re a woman, an annuity offered by your employer is a better deal, but if you’re a man, you’ll get higher returns from a commercial annuity.

And, even though annuities may look attractive now that we’re in the market for security blankets, there’s a catch. This probably isn’t the best time to buy them. Payouts from annuities go up and down with interest rates at the time of purchase, and interest rates are about as low as they can go right now.

Still, says Olivia S. Mitchell, chair of the Insurance and Risk Management Department at the University of Pennsylvania’s Wharton School, “one solution to that is to not buy all at once.” Mitchell and Joan Bloom, executive vice president at Fidelity Investments Life Insurance Company, say investors might want to consider “laddering” investments in annuities, or investing in annuities at regular intervals, not all at once.

Bloom also says that while returns on annuities do tend to go up and down with interest rates, they don’t go up or down as much as the overall market.

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